What is the future of impact investing?
Authored by Michelle Di Fabio.
As a 2016 participant of Oxford University's Impact Investing Programme at SAID business school, I met with key market participants to understand the challenges and opportunities of impact investing including global governing bodies, pension funds, social enterprises and institutions. These are my learnings and reflections on the global impact investing landscape and implications for the pension (superannuation) market in Australia as published in AIST's December 2016 Super Talk.
What is impact investing?
Impact investments are investments intended to create positive impact beyond financial return. As defined by Global Impact Investing Network (GIIN), this definition can be broken into three underlying components: intentionality, measurable social and environmental impact, and financial return.
Impact investing is one of many ways of funding ethical investing projects through social finance. Whilst impact investing may fall under the umbrella of the Environmental, Social and Governance (ESG) responsible investing approach, the two approaches do have some differences – notably the fact that ESG is often used as a way to better manage risk while impact investing aims to generate and measure social returns above financial returns. Some pension funds globally have extended ESG practices to include an element of impact investing, targeting financial returns with a social impact element.
There is an increasing view that impact investing is an approach that spans all asset classes, impact areas and geographies rather than an asset class itself.
Why is impact investing important?
Impact investing can achieve positive outcomes for both society and investors. It is often a way of putting money into social issues that require a new solution.
The World Economic Forum defines motivation for impact investing as the ability for private investment to address social challenges to create tremendous societal change; increasingly millennial driven as the emerging generation of investors; and the opportunity for investors to carve out a competitive advantage.
What is the state of the market globally?
The GIIN estimates the impact investing market to be worth around USD$ 77.4 billion globally and growing. In 2016, the amount of money committed impact investing projects increased by sixteen per cent.
The greatest allocation of impact investments is within North America (38%), followed by South America (15%). Oceania currently has the smallest allocation (3%). Impact investing is delivering positive outcomes in employment, aged care, health, social housing, education, microfinance, and sustainable agriculture.
In 2013 the G8 formed a Social Impact Investment Taskforce – including Australia – to further develop a market for global investments that deliver a social benefit. Australia’s participation in the G8 taskforce has resulted in the launch of an Australian strategy to advance impact investing.
In the UK, a wholesale impact fund – Big Society Capital (BSC) – has been formed by the government with the objective of growing social investment.
What are Australian superannuation funds doing?
A number of funds are already leading impact investing in Australia such as HESTA, Christian Super, Australian Ethical, Local Government Super and First State Super. Financial institutions including QBE, National Australia Bank and Westpac are also on board. Australian impact investment case studies include the National Rental Affordability Scheme, StrEAT, TOM Organic and Good Start Early Learning. Case studies include:
- HESTA announced a partnership with Social Ventures Australia to launch the Social Impact Investment Trust where they committed AUD$30 million to invest in employment, education, housing and health.
- Christian Super has committed over AUD$140 million to impact investing over the last ten years. The fund has recently established a new company called Brightlight Group, an investment advisory and investment management business whose mission is to create a pathway for institutional investors to enter the impact investing space over the next five years.
- Australia Ethical established a foundation to fund social enterprises and to provide an ability to trade off between impact and return. Australian Ethical is required under its constitution to donate 10% of its profits to charitable causes and runs a grant program as means to distributing these.
- Local Government Super has impact investment assets exceeding $770 million across five asset classes. Notable are $90 million in green bonds issued by Australian and multinational issuers that fund environmentally beneficial projects. LGS has recently deployed more than US$50 million into a strategy that will build renewable energy infrastructure in emerging market regions.
- First State Super believe impact investing can make a positive difference to the communities in which their members live, work and retire. Over the past 12 months they have invested over AUD$1.3 billion in urban infrastructure, technology, regional hospitals and agriculture. These investments are already providing jobs and services and will deliver sustainable long-term returns to our members and the community.
What are the challenges faced by funds in Australia?
Challenges identified by the superannuation sector include:
- Without scale, take-up of impact investing will remain fragmented
- Misconception that investing for impact requires a financial trade-off
- Lack of reliable research, information and benchmarks
- Limited availability of appropriately designed (or quality) investment opportunities
- Lack of intermediaries in the market to facilitate transactions
- Lack of awareness and education that leads to market participation
- Concerns around fiduciary duty
Where to now?
In a 2016 report the Australian body for impact investing, Impact Investing Australia, highlighted that active impact investors are aiming to triple the size of their impact investment portfolios over the next five years. This would translate into an impact investment demand of AUD $18 billion. The primary motivation by investors to allocate funds to impact investments is mission alignment, followed by client demand.
The government also plays an important role in driving policy to influence impact investing outcomes. In Australia, the NSW government was first to pioneer social benefit bonds with other states including QLD soon to follow. Impact Investing Australia has estimated that social and environmental impact investments have positively impacted over 60,000 beneficiaries across Australia.
Australia is uniquely placed to become a leader given the size of our pension system relative to the size of the economy. Impact investing could potentially help address a number of social challenges that lack funding due to the inability of public finances. At the same time, these investments could increase the influence and size of asset owners such as superannuation funds.
Superannuation funds will play a pivotal role to build scale to efficiently build the impact market in Australia. There is opportunity for the superannuation sector to take a leadership role and develop the impact market by collectively discussing the challenges and opportunities, building awareness and market participation, and funding social projects that could influence retirement outcomes. There is also an opportunity for superannuation funds to assess demand and opportunity for impact investments and potentially carve out a competitive advantage.